Building My Prosper Plan
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After having been a Prosper lender for a little over a year now, I have been examining my approach to investing in this area. Since lending is a form of investment, specifically related to my own personal finances, it is important to question my prosper strategy to ensure I am on track with my goals.
| Breakdown | Percentage |
| Original Investment Maximum | 2% |
| Interest Reinvestment Maximum | 3% |
| Total Investment | 5% |
Original Investment
This represent the total amount of my own investment capital which is to not exceed 2% of my net worth. One reason is because Prosper loans are unsecured loans which means there is no collateral attached to these loans. If the borrower defaults on their loan, the odds of getting my money back will be reduced to little to none.
Interest Reinvestment
Reinvesting my interest in Prosper will allow me to grow my lending portfolio with money earned from active loans on a monthly basis. While there is still an inherent risk with lending, the interest earned is not an original investment. If the borrower defaults on the loan, I would not loose any more than 2 percent of my original investment.
The interest reinvestment is capped at 3 percent which in combination with my original investment represents 5 percent of my net worth. Should my lending portfolio exceed 5 percent of my net worth, I will be transferring out any excessive balance into other investment opportunities.
Unknown Factors
At the moment, I am unsure whether this approach will be effective due to the fact that my net worth is rising on an annual basis of at least 25% a year. The reason behind this strategy is because of the elasticity of my Prosper portfolio. When an borrower makes a payment, it lowers the amount of loans I have extended. This in turn, lowers the amount of income I can generate from my loans (called DIA - Daily Interest Accrual).
It will take some time before I get my money back so until the loans I extended in 2006 is paid back in full by 2009, I will not have an answer to other questions I have about this strategy.
Comment by Dividends4Life on 10 May 2008:
It sounds like you have had a good experience with prosper. As the economy turns down, have you noticed a higher incidence of default?
Best Wishes,
D4L
Comment by passivefamilyincome on 12 May 2008:
I like your strategy. I have been investing in prosper since January of this year and have had good success so far. I have a plan to invest in 2 $50 loans per month by having $25 automatically transferred from my bank account each week. It is such a small amount that I won’t miss it if any of my loans default. So far I have only 1 out of 36 loans that has been late. My strategy is to bid only on loans where people are trying to get out of debt, specifically credit card debt.
Looking forward to reading more of your posts.
passivefamilyincome
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Comment by Mark from TheLocoMono on 12 May 2008:
D4L - I will have to check the Prosper site to see what their current default rate is now with the downturn in the economy. Personally, I have not yet to experience it with my borrowers.
PassiveFamilyIncome - That is another area that I am still figuring out, how to invest on a consistent basis because the borrowers are basically paying throughout the month. While 50 dollars is fairly small, combined with the interest reinvested, it increases the earning power. Just a question of timing.
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Comment by passivefamilyincome on 13 May 2008:
One other point I wanted to mention about prosper is that I take the principal and interest each month and turn it back into another bid once I have the $50 minimum. Unfortunately, I find that the bidding process can take a lot of my time. It seems that I find a loan that I really like and then get outbid and the bid closes while I am offline. Recently, I have been deciding how low I will go on a bid and submit that amount. That way, if the loan keeps getting bid down, I will have set my bottom limit. This has been working well for me lately.
passivefamilyincome’s last blog post..Continuing a Covered Call Option Strategy